United States: Shareholder Rights; Family Style

Listen to the rhetoric of any political campaign and you will hear the familiar refrain. "Family business is the backbone of the American economy."  Factually, true enough but history has taught us that families that play together don't always stay together.  So here is the common scenario: a couple forms a business. They do it on the dining room table of their first apartment and without thinking about any consequence, husband takes 80% of the stock and gives wife 20% because she is going to do the books and scheduling the appointments. Or perhaps they do it 50/50.  But as time evolves one spouse clearly becomes the "active" manager and the other moves on to other things.  The business grows and today the board room of the business is 4x the size of the dining room it was started in.

You represent the "outsider" spouse. She owns 20% of the business and you ask for the tax returns and other related documents in modest proportion.  You are ignored.  You ask her to contact the family accountant who now does the accounting she once did and when she asks them for the same records, she is ignored.

You can always file motions to compel in family court. Sometimes effective; sometimes not. But there is another avenue worthy of consideration.  You not only represent a spouse, you also represent a minority shareholder who has statutory rights under Pennsylvania's business corporation law.

That law does a better job of defining rights than anything we have in the Divorce Code, where the business involved is not already required to file disclosures under federal and state law with securities regulators. For example, every shareholder has the right to annual financial statements including income statements and balance sheets.  They are to be mailed to the shareholders 120 days after close of the fiscal year.  If independent analysis is done in the form of a compilation, review or audit, that report is also to be published once the accountant has completed the work. The applicable section is 1554 of the Business Corporation Law and the comment to it states that failure to comply is clear evidence of conduct sanctionable under 42 Pa. C.S. 2503(7).  These rights are not really subject to limitation by the shareholders agreement unless it was adopted prior to 1991 and even then it applies only to shareholders who had that status in 1991.

There is also the right to examine the books and records of the corporation. This includes, stock registers, shareholder address records and the bylaws and minute books.  The right is to be exercised at the place where the records are kept during normal business hours and includes the right to have copies made.  Section 1508.  There is a good faith standard here but that is intended to keep shareholders from essentially occupying the business with a limitless set of demands.

Failure to comply with a written request within five days invites a petition directed to the court to order the inspection. The burden falls on the corporation to show improper purpose in proffering the request.  Pennsylvania corporations are required to hold an annual meeting every 12 months. Section 1755.  If a meeting has not been held in 18 months any shareholder has the right to demand one.  In addition, special shareholder meetings can be called by any shareholder or group holding 20% or more of the voting stock.

Unless "written out" of the corporate documents, cumulative voting is permitted. This allows each shareholder to vote all of his shares for one director candidate even though there might be three open seats.  This allows minority shareholders to aggregate votes to assure that one of their candidates can secure a seat on the board.  So, in a setting where there are three board positions open and six candidates, a shareholder with 2,000 shares can cast 2,000 votes for one candidate.

Section 1791 allows for judicial supervision of corporate governance. One such right is to secure a summary order for a corporate meeting where the bylaws designate an annual meeting date but management fails to call the meeting.  Section 1793 allows anyone to raise issues of improper corporate conduct.

Majority shareholders have a fiduciary duty to act for the benefit of the corporation in contrast to their own individual benefit. Ford v. Ford, 878 A.2d 894,905 (Pa, S, 2005); Viener v. Jacobs, 834 A.2d 546,556 (Pa.S, 2003).  A majority that acts to its own benefit to the oppression of the minority may be liable in damages.  This can include conduct like refusal to pay dividends where there are profits and reasonable cash flow, appropriation of business assets or payment of unreasonable salaries.  It also includes withholding information from shareholders.  The same is true of officers and directors, Sections 1712(a)&(c).

Indeed, much of this disclosure is available through the divorce process. So why spend any time thinking about it?  To this writer's mind, the rights and remedies are much more clearly articulated and not really subject to the "it's just harassment" defense commonly seen in discover court.  Second, when attacked from a corporate governance viewpoint, you may find other shareholders of the business will rally to your cause or apply pressure to the uncooperative spouse to "get this solved, it's costing the corporation money."  These tools may open some doors to resolving not only the discovery but the case itself.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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